JEFFREY BROWN: Some 80 percent of Americans now have at least one credit card. But amid a deep recession, credit card debt is getting ever harder, and many are having a tough time keeping up with payments.
According to the Federal Reserve, more than 6 percent of all credit card debt was in default in the last quarter of 2008. And, says one private group, the average outstanding credit card debt for households tops $10,000.
One result: Credit card companies are now on the defensive, facing criticism for unfair lending practices, including raising rates on consumers as they fall further behind.
U.S PRESIDENT BARACK OBAMA: It’s been out of balance.
JEFFREY BROWN: It was against that backdrop that President Obama brought 13 company executives to the White House today and told them that their practices needed to change.
BARACK OBAMA: I think that there has to be strong and reliable protections for consumers, protections that ban unfair rate increases and forbid abusive fees and penalties, that the days of any time, any reason rate hikes and late fee traps have to end.
JEFFREY BROWN: The president said that he wants the industry to be profitable and stable, but new legislation is needed to provide, among other things, clearer disclosure to consumers.
BARACK OBAMA: All the forms and statements that credit card companies send out have to be written in plain language and be in plain sight. No more fine print; no more confusing terms and conditions. We want clarity and transparency from here on out.
JEFFREY BROWN: The Federal Reserve recently ordered some new consumer protection rules, but those don’t take effect until next year.
In the meantime, pressure is also mounting from Capitol Hill. Yesterday, a House committee moved forward with a credit card holders bill of rights that would end arbitrary interest rate increases and penalties and mitigate some late fees. A similar bill is pending in the Senate.
Effect of economic downturn
JEFFREY BROWN: And for more about credit and debt in a recession, we turn to James Surowiecki of the New Yorker magazine. He writes a business and finance column called "The Financial Page." He's also author of the book "The Wisdom of Crowds."
Well, let's start by talking a bit more about the credit card debt problem itself. How much has it grown? And in what ways is it feeding or fed by this economic downturn?
JAMES SUROWIECKI, The New Yorker: Well, debt has been a big issue, obviously, for America for a long time. But I think the thing that's most striking is that, over the last, let's say, seven or eight years, you've seen a pretty steep increase in the amount of credit card debt, which now is around, I think, around $1 trillion for the United States.
And the problem is that that's happened even as Americans have, for the most part, not seen real increases in their income. So incomes for the most part have been pretty much flat since about 2000, while credit card debt has soared. And as a result, obviously, that means that people are more in debt than they once were and obviously have less of an ability to pay it off.
JEFFREY BROWN: So today we see the president call in these companies. What kind of practices are now under the spotlight?
JAMES SUROWIECKI: Well, I think there are a few things. I mean, one of the things that President Obama talked about was what he referred to as any time, anywhere, I think, rate increases.
So one of the things that credit card companies are able to do -- which is a little strange -- is, if you borrow money, so you charge something on your credit card, and you're paying a certain interest rate, whatever it is, the interest rate is, you know, you have at that time, the credit card company can actually raise an interest rate on the money you've already borrowed at any time.
In other words, when you make the charge -- you may be paying, I don't know, say, 12 percent -- and a few months later, if you haven't paid that debt off, the credit card company can then raise that to 17 percent. So effectively you took out a loan at one interest rate and suddenly find yourself paying another one.
Another thing that he talked about, which is -- which is an issue, is, obviously, just the question of late fees. So there's some real question in many circumstances about whether or not credit card holders have enough time to pay off their debt.
And when they actually send in their payments, it's sometimes the case that, you know, the payment arrives on, let's say, April 1st, but it isn't recorded until April 5th, which is after the due date. And then they end up getting charged a late fee. That's another thing that I think people want to do away with.
And then there are other more complicated things that have to do with -- they're sometimes called double-billing cycles and the rest that I think also regulators would like to do a better job of controlling.
Credit companies on the defensive
JEFFREY BROWN: Now, of course, from the credit card companies' perspective, they say that they have to do things to protect their losses, especially at a time like now, and cutting off people who are no longer good risks, from their perspective, might be good business. So explain their argument.
JAMES SUROWIECKI: Well, it's a couple of things. I mean, one of the other things that's gotten the credit card companies -- that has earned them some heat recently is that credit card companies, as you've sort of alluded to, have actually been cutting back on the amount of credit they're offering.
So they're actually cutting back on people's credit lines. In some cases, companies have actually offered some of their customers money in order to have them close their accounts. They've raised interest rates on many of their customers and the like, and this has created, fomented a lot of criticism of them.
I think the case that they would make for these practices are, you know, in a sense, they're trying to do a better job of managing credit risk. So one of the things they did, I think you could argue, over the last, say, five or six years, much like banks did, was they probably handed out way too much credit. They just handed out credit to people who weren't ultimately going to have a chance of paying it back. One of the things they're trying to do now is rein that in.
That part of it, I think, is reasonable; some aspect of that is reasonable. Tightening requirements, you know, trying to match interest rates better to risk and the like.
The things that Obama was talking about, though, I think are for the most part things that an industry is kind of using these sort of tricks that most people are not familiar with or can't really figure out are happening to actually try to maximize their profits.
Protection for consumers
JEFFREY BROWN: So, but the larger perspective here -- and I'll make it a question -- is, is the larger way to think about this how to protect consumers, at the same time as not doing things that stem more lending?
JAMES SUROWIECKI: Yes, I mean, there's a real paradox here. And I think we're seeing it not just in the credit card industry, but across the financial sector. But this credit card story is a really great example of it.
And the paradox is that we want, in the long run, people to borrow less. We want people to be more responsible in their spending, and we want lenders to be more responsible in the way they lend money. We want them to do a better job of actually measuring risk.
The problem is, we also don't want them to clamp down on lending so tightly that it continues to magnify the recession or makes it hard for people to continue to spend and the like, so there really is this kind of tension. And I think we're really seeing it right now.
And I think, actually, if you looked at what Obama said today, you could see him trying to walk that line. He actually was not, I think, as critical of the companies, at least in his rhetoric, as maybe some people had expected and as I suspect some people had hoped.
And I think what he's trying to do, again, is balance the recognition that, you know, credit card companies need to make money if we want credit cards to exist, and I think most of us probably do. But at the same time, we really do need to do a better job of regulating them and, I think, a better job of, you know, giving consumers a chance to manage their money in a reasonable way.
Need for more transparency
JEFFREY BROWN: I know a lot of our regular viewers will know that my friend and colleague, Paul Solman, did a piece the other day for us on the paradox of thrift, which is a related idea to what you're talking about, right?
JAMES SUROWIECKI: Yes. I think it's very much what we're seeing is the kind of paradox of thrift, which is to say that, while it may be good for any one person to be more responsible, to be more thrifty at a time of -- you know, when the economy is in difficult shape and the like, if everyone does it at once, it simply magnifies the downturn. It makes the recession steeper, and it makes it harder to get out of it.
And we're seeing that -- I'm sorry -- we're just seeing that a little bit with the credit card situation, where, in the long run, it probably is better if Americans borrowed less. In the short run, it's probably going to make the downturn a little harder than it otherwise would be.
JEFFREY BROWN: And let me ask you before we leave, while Congress, while the president, while everybody's looking at possible new regulations, do we know from the research what the best kind of protections are or the most useful ones, at least in the coming term?
JAMES SUROWIECKI: Well, I think the one thing we do know is that, to some extent, transparency helps. So I think, when Obama talked about, you know, the fine print, I mean, it is amazing if you think about how massive the disclosures are, how kind of unreadable they are. So I think that that's one thing that would help.
I also think that the interest rates, this ability to raise interest rates on past balances is something else that will probably help people manage their money better.
Having said that, it's very clear that it's harder to get people to be responsible with their borrowing and their spending than we would like it to be. And so I think that one of the things, you know, we're going to see going forward is people spending lot of time trying to figure out exactly how to do that best.
JEFFREY BROWN: All right. Well, as we said, a lot of talk and moving forward with possible legislation, and we'll watch it. James Surowiecki of the New Yorker, thank you very much.
JAMES SUROWIECKI: Thanks for having me on. I appreciate it.